There is a lot of confusion about semiconductor supply availability. Is the shortage over? Are there still constraints? Certainly, the production and supply of chips has improved, but we are in a correction, and companies should not be fooled.
Due to increased buying during the height of the electronic component shortage coupled with a dip in demand which continued through Q1 2023, many OEMs and contract manufacturers find they have an inventory imbalance. They have a surplus — an abundance of some electronic components — while still missing the “golden screws,” or parts needed to complete production.
As a result, companies will continue to spend much of 2023 trying to absorb or sell surplus inventory and acquire those parts that are critical to ensuring the completion of their manufacturing processes. This may take longer than we think. Many companies have pulled back on CAPEX and are taking a wait-and-see approach to forecasting.
However, once the “fat” — the surplus — is out of the system, demand for more chips will explode, as the expected super cycle begins in 2024 with EV, AI, IoT, 5G and other technological developments as major drivers. The demand will remain constant, but the IT infrastructure build-out to support this demand will still not be completely online. This will lead to unpredictability in the supply chain through 2025.
The new fabs will not necessarily resolve the shortage
The re-shoring of manufacturing is in full swing, and new semiconductor production fabs being built in the U.S. will come online in the next several years. But even with additional manufacturing, we expect to see supply chain volatility due to component constraints in some areas and continued inventory mix issues — albeit to a lesser degree — until 2030.
In part, this volatility will be driven by the explosion of the super cycle, as industry and consumers rapidly adopt newer technologies at a pace unseen in the past, creating an even greater demand for chips.
While new fabs are being built to alleviate additional pressure on the supply chain to meet the future demand of this technological renaissance, they will be producing more complex advanced nodes and smaller wafers required by the next generation of technology. Thus, there will still be problems with the inventory mix. There will continue to be extremely high demand for older chips to support products that have a much longer lifecycle in key industries, such as medical and automotive, and it is unclear if the new fabs will support production of these components.
Until we know the extent of demand for super cycle products, it is difficult to plan for the proper inventory mix. Once there is greater visibility into component needs of products still in development, and we get closer to the power and infrastructure build-out, we will have a better understanding of the supporting elements needed to stabilize the supply chain.
Prescriptive advice for businesses
Manufacturers should not fall asleep at the wheel. When the next super cycle hits — even if the global economy is good and demand rebounds — the basic problems of the global supply chain will not be resolved, and most likely the market will lag for several more years.
- Businesses should continue to prepare and plan for longer component production lead times, especially for those that go into power supplies. Recognizing delays and issues are part of the new normal, companies will need to be more agile, so they are prepared to pivot.
- Planning for flexibility in their bill of materials beginning with new product introduction (NPI), and identifying multiple sources for these materials, will be crucial to navigating the next several years and maintaining production timelines.
- Supply chain leaders should closely monitor not just semiconductor availability, but also the entire inventory mix. Consideration should be given to maintaining supply assurance by securing an adequate buffer stock to meet current needs while also focusing on future proofing of internal supply to meet the demands of next generation technology.
- Tap supply chain partners, who use advanced analytics, to identify both macro trends and market anomalies in real time to help forecast issues before they escalate and mitigate the negative impacts. Using advanced analytics is especially important to identify component availability and spot trends such as expected gaps, product change notices and price increases during NPI before beginning production.
- Finally, keep in mind sourcing partners with a global presence often have access to thousands of manufacturers, and can help fill gaps for critical components, and sell excess inventory to assure supply continuity and de-risk financials.
Jennifer Strawn is executive vice president, head of global solutions and sourcing for Rand Technology.
